Practise What You Preach With ESG

Environmental, Social and Governance (ESG) is an increasingly hot topic and one that is very much part of the public zeitgeist with many cities around the world hosting Extinction Rebellion protests.

Some parts of the financial services sector have taken some cues and have products that are specifically tailored to address corporate and public concerns. An example that is often considered to be ahead in this respect is the Insurance Linked Securities (ILS) market. It is increasingly regarded by some commentators as doing what is right when it comes to incorporating ESG criteria into their rating business models.

As I wrote and talked about previously (see links at the end of the article to previous CSR blog and podcast), the traditional insurance and reinsurance carriers are lagging behind in this area but importantly this is coming to the attention of the rating agencies such as AM Best.

So, given how important ESG is, how can insurers improve or retain their rating agency score through a more structured or automated approach that captures their risks and exposures to clients with investments in fracking, tobacco, junk food, high carbon footprint organisations?

According to A.M. Best the insurance sector is uniquely positioned to tackle the ESG agenda given their role as risk managers, institutional investors and risk carriers that they work with and on behalf of a wide range of industries and sectors.
There’s a high demand for integrating ESG criteria into investment decisions, not only in Europe but also in the US and Asia. Although the market appetite for ESG is more recent in the US, according to the 2018 Report on US Sustainable, Responsible and Impact Investing Trends, in 2018 $11.6 trillion of all professionally managed assets were already part of ESG investment strategies, for example.

Insurers face huge risks and opportunities associated with climate-change trends and challenges to close the protection gap. Many of the biggest insurance brands such as Munich Re, Swiss Re and Allianz are aware that many of their shareholders expect them to align their long-term investment and underwriting strategies accordingly. Such strategies need to be broad, to ensure that they include the wide and varied elements of ESG. These tend to include things like the implementation of exclusion criteria in underwriting lines for eliminating certain “toxic risks” such as weapons, coal-based energy production, and tar sands, as well as the more common concerns around the organisations that are not environmentally friendly.

Of course, businesses have to be able to see a financial return as well, which is part of the skill of being able to identify and act upon the combined ESG and financial opportunities. An example of this is Nephila Climate, they invest in a series of weather and climate related risks and is starting to see more opportunities to provide hedges to renewable energy investment projects, whether this be wind or solar farms. These facilities usually need to raise quite significant debt finance as part of the original investment.

Nephila Climate has been able to structure a hedging product to facilitate the management of this risk, and hence the financing of those loans. They see this business growing more as the world shifts further towards renewable energy, away from fossil fuels and as the ESG agenda becomes more important to individuals and businesses alike.

It is important that all aspects of a business play their part in helping their business define and meet its ESG goals and objectives. IT leaders and influencers are certainly a big part of that. The drive towards big data and the capture of more and more data is driving the demand for more data centres. With the increase in the amount of data being collected by microsensors and the Internet of Things (IOT) devices increasing the speed of data collection and storage is only going to increase. We are already at a point where 90% of all of the information created since the beginning of human history has been created in the last 2 years, and with 4.1Bn people with access to the Internet that figure is only going to increase.

All of that data to has be stored somewhere which means that a big part of organisation’s ESG strategy is going to be ensuring that they have a good strategy for what they store and how they store it.

Data centres in the U.S. alone (where a large proportion of power generation is still from coal) are already consuming more than 90 billion kilowatt-hours of electricity a year. Globally data centres consume 3% of total energy created annually. This is enough to run and provide all of the power requirements for the whole of the UK for over 1 year 5 months.

Companies such as Google are looking at innovating solutions that reduce the power consumption and cooling requirements. One example is their use of cold seawater and rain water to cool their data centre in Hamina, Finland.

Global insurance companies are data rich entities and their carbon footprint will only grow as their digital footprint consumes more resources. In this new world of ESG they will therefore come under increasing scrutiny from investors, regulators and their customers who will put pressure on them to embed socially aware practices in their business strategy.

Organisations that do not have an ESG strategy yet, need to start the process and be able to demonstrate their credentials and values in this area. At this time, this is still a business opportunity, but in the not too distant future, this will become a business normality and expectation. For those firms who are unable to make the transition it may be a quick transition from investable and rateable to un-investable and unrateable.

Contact Fifth Step today to start or speed up your ESG journey, email: info@fifthstep.com web: https://fifthstep.com/ESG

* https://www.fifthstep.com/Episode-47-CSR-and-Financial-Services

* https://www.fifthstep.com/corporate-social-responsibility